The Garden Office: A CGT Pit?
Working from home has become the new normal; and when society finally arrives at the point where the pandemic is under control, it is unlikely there will be a wholesale return to the office. And why should they?
Recent statistics shows that 60% of UK adults were working from home during the peak of the covid-19 lockdown, with each saving nearly £45 a week in so doing. A quarter of them planned to continue to work from home either permanently or occasionally after lockdown.
Unsurprisingly, the market for garden offices and sheds has increased substantially this year as workers decamped with their laptops and mobile devices from the kitchen table or the sofa to a dedicated garden office where they can work uninterrupted.
Tax risk
Though there are short term tax benefits, the main problem with garden offices is that they raise potential tax implications for the unwary if you come to sell your property.
Individuals may be able to claim VAT and income tax benefits and/or corporation tax relief if they have a limited company through which to do so, but the extent to which they can depends in part on how much of the property is used for private use.
But if the garden office is not used for private use and dedicated solely to work, when the worker comes to sell their home they could be landed with a capital gain tax (CGT) bill. As the rules currently stand, if any part of the home that is used “exclusively for the purposes of a trade, business, profession or vocation”, CGT will be levied on a proportion of the profit of the sale to represent the portion of the property that is exclusively office use.
Given that the building cost of the office will be deducted from the deemed profit on sale, CGT is likely only to bite if a sale does not take place in the short term. But if, for instance, the property is sold in a few years at a time when property prices have spiked – the seller could incur a tax bill on the profit.
HMRC can look forward to an increase in their CGT receipts in the years to come and is known to scour the internet for information to extract more tax out of the tax payer. The online property website, Rightmove, for instance, easily reveals those properties advertised with their own office – and lead to enquiries from HMRC with a view to uncovering a potential CGT liability.
The key to avoiding a tax liability is to ensure that the garden office is not used exclusively for the purposes of a trade or business and ensuring it is not advertised as such in a future sale (or even touted as a child free zone on social media).
Installing an exercise bike or a bookshelf of children’s books in the office may just suffice, but always take specialist advice if you need clarity.
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you